Exchange Traded Funds – (ETF’s) – How do ETFs work?
ETFs are index funds, but have the trading characteristics of a share as they are traded on exchanges.
When it comes to buying and selling ETFs, they work similar to shares.
ETFs trade on your local stock exchange in the same way as shares of any public company. You can easily buy and sell ETF,s through any brokerage account or your financial advisor.
ETFs can be traded at any time during normal trading hours.
ETF fund units are not shares of a company, like Shell or Unilever, they are units of a fund which holds a portfolio designed to closely track the performance of a chosen market index.
When it comes to market exposure, ETF’s work like unit trusts.
Each ETF closely tracks a specific market index, offering new ways to get cost-effective exposure to the markets you want. Like traditional mutual fund owners, ETF investors own a pool of securities.
This has the advantage of spreading your risk over several securities, not just one. Index investing is a time-tested, analytical approach to getting broad market exposure and a high degree of diversification at much lower costs than active mutual funds. An active mutual fund is a fund that aims to provide above-average performance by using human judgement and/or quantitative tools to select and trade stocks and asset classes. Active fund managers try to outperform indices or meet specific total return targets. Index fund managers, by contrast, try to match the performance of indices as closely as possible.
All financial investments involve an element of risk to both income and capital. Transaction or brokerage fees will apply. Liquidity is not guaranteed.
Exchange Traded Funds (ETF’s) have revolutionised the way investors manage their portfolios. The provide simple, flexible, cost-effective and offer opportunities to spread risk. These benefits have driven the popularity of ETF’s and the USA around 50% of all collective investments are held via ETF’s, in the UK the percentage is below 20%.
LOWER COSTS WITH ETFs
Keeping the cost of an investment down is important. ETF’s aim to deliver the performance of the market and charge for delivering just that – no more, no less.
ETF’s and Security Lending
It is not generally known but Securities Lending using the assets of an ETF fund is a widespread industry practice. There is a view that this can increase the returns of an ETF fund but others claim that this is an additional third party risk and will mean that investors are left holding assets different to the assets they thought they had acquired.
Recently BlackRock has changed its stance on Securities Lending by removing the previous 50% lending limit on iShares.
We are fairly relaxed about Securities Lending provided that there is no risk to the value of ETF assets – as many ETF funds claim.
However how can ETF providers claim that their ETF products are ”totally transparent” when an ETF fund may be used for the security of a loan ?